Problem
An investor is considering the acquisition of a "distressed property" which is on Northlake Bank's REO list. The property is available for $202,600 and the investor estimates that he can borrow $160,000 at 4.5 percent interest and that the property will require the following total expenditures during the next year:
|
Inspection
|
$ 539
|
|
Title search
|
1,078
|
|
Renovation
|
13,000
|
|
Landscaping
|
878
|
|
Loan interest
|
7,239
|
|
Insurance
|
1,839
|
|
Property taxes
|
6,039
|
|
Selling expenses
|
8,000
|
Task
1. The investor is wondering what such a property must sell for after one year in order to earn a 20 percent return (IRR) on equity.
2. The lender is now concerned that if the property does not sell, investor may have to carry the property for one additional year. He believes that he could rent it (starting in year 2) and realize a net cash flow before debt service of $1,980 per month. However, he would have to make an additional $7,980 in interest payments on his loan during that time, and then sell. What would the price have to be at the end of year 2 in order to earn a 20 percent IRR on equity?